Second in a series of editorials
The French and Indian Wars were raging in 1744, and Massachusetts was desperate to defend its coastline. So the Colony rolled the dice and launched the New World’s first government-sanctioned lottery, in 1745, to raise money for its defense. More than one in five players won something in the contest, yet it was still risky enough that all who entered were officially christened “adventurers.”
Today, what was once conceived during a wartime emergency has evolved into a routine economic burden on those who can least afford to shoulder it. Residents of Massachusetts spend on average more than $700 per person on the lottery every year, more than triple the national average of around $200. But those numbers mean little without this context: Research shows that more than half of all lotto tickets are purchased by people in the poorest third of all households. Many report they buy tickets out of desperation.
On Beacon Hill, the lottery is a sacred cow because it is a cash cow — an efficiently run organization that provides nearly $1 billion to cities and towns. Without that financial lifeline, municipalities would have to raise taxes or cut spending. Yet, because of antiquated formulas, too much of the proceeds flow into many of the state’s wealthier communities, essentially subsidizing the life of the rich at the expense of the poor. We can no longer avert our eyes from the corrosive way our government services are funded.
State revenue comes, disproportionately, from poor communities, which generally have more lottery agents and generate more sales. This is by design, since areas with the most desperation buy the most tickets. That uncomfortable fact is too often met with a libertarian shrug — nobody makes poor people buy tickets. Still, there are means to improve the economic impact of the state lottery without taking away any consenting adult’s right to gamble, and state officials truly committed to fighting economic inequality should at least explore them.
Doing so would take some tinkering by the Legislature and state Treasurer Deb Goldberg, but more important, it would require a back-to-the-future shift in the way the state thinks about the purpose of its lottery. It’s little appreciated now, but raising money was only one of the reasons the state got into the modern lottery business in 1972. The other was to eliminate illegal underworld games and the accompanying crime, which prey disproportionately on the weak — the state’s goals, in other words, were both financial and social.
But we shouldn’t continue to trade one form of exploitation for another. Instead, the lottery should try to perform a balancing act, by meeting the demand for gambling in the least harmful way. Instead of only seeking to maximize revenues for municipalities, Massachusetts ought to make the welfare of lottery players themselves a central part of its mission, harnessing the lottery’s network and popularity toward social ends once again.
First, the state should reform the way it divides up lottery proceeds, so that needier communities keep more of the money, reducing the inequality the lottery creates. Second, the lottery itself should offer a wider range of products and services on the ground, leveraging its extensive reach and good reputation.
The system for dividing up lottery proceeds in Massachusetts makes little sense and might be the best place to start reforming. The formula hasn’t been updated since 2010, when lottery aid was merged with another state aid program. So the state is still using real estate values from that year as a proxy for need; the lower the property values that year, the more a community is assumed to need. To the extent that measure was ever a reliable way to divide up aid, it gets less so every year as property values change.
But as Bo Zhao, an economist at the Federal Reserve in Boston, has documented, even that formula didn’t correlate to the actual municipal funding gap. Communities on the Cape, for instance, get the short end of the stick because real estate prices are skewed by expensive seasonal vacation properties. He recommends basing distribution of aid on current factors like poverty and unemployment, which would end quirks of the current formula that mean places like Brookline and Milton get more out of the lottery than needier communities. Legislation sponsored by state Representative Antonio F.D. Cabral would make that overdue change.
Meanwhile, improving the lineup of products would mean taking a page from lotteries overseas, which have embraced innovation faster than most American lotteries. Other jurisdictions have found ways to offer players the thrill of big jackpots while reducing some of the downsides.
A first step would be for the lottery to introduce prize-linked savings lotteries, like those conducted in Sweden, the United Kingdom, and several other countries. In a prize-linked savings game, gamblers buy tickets just as they do now. There’s still a drawing and a winner; prizes are funded by the combined interest on all the ticket purchases. But the tickets themselves retain their face value as principal and can be deposited into a bank account. Goldberg could continue the lottery’s pioneering traditions by experimenting with a prize-linked savings ticket and ask for legislation if needed to implement one.
Another step would be to allow transfers — for instance, allowing lottery players to transfer a winning ticket to a prepaid debit card. The prepaid card industry has a history of exploiting low-income communities with outrageous fees; it’s at least worth investigating whether the state could provide such a basic banking service instead.
Some of those innovations, in particular prize-linked savings, could reduce the profitability of the lottery or lead to smaller payouts to municipal governments. It would not be a profit-maximizing strategy for the state — but then, neither is the policy governing licensed casinos, the Commonwealth’s other form of legalized gambling. The state’s 2011 casino law diverts a percentage of proceeds to benefit the horse-racing industry instead of funding general needs. Surely if the state can forfeit a bit of its take from casinos to support a special interest group, it can accept a lower return on the lottery if it yields a broad public benefit that particularly lifts low-income families.
Considering the reliance of cities and towns on lottery revenues, it’s not hard to see why politicians have avoided tackling its fundamental unfairness. Nonetheless, it is one thing to raise emergency funds from willing and eager “adventurers,” it something entirely different to fund routine government services by monetizing our vulnerable neighbors’ desperation. The state won’t know if it can reduce these regressive effects until it tries.